Announcing his decision, Mr Monti warned that not approving the budget "would render more serious the government crisis, also at a European level".

He said that after it is approved, his resignation would be "irrevocable".

Leaders of both Mr Berlusconi's centre-right People of Freedom (PDL) party and the centre-left Democratic Party (PD), which is leading in the opinion polls, said they would pass the budget.

"Faced with the irresponsibility of the right that betrayed a commitment it made a year ago before the whole country... Monti responded with an act of dignity that we profoundly respect," PDL leader Pier Luigi Bersani said.

"We are ready to approve the budget in the fastest possible manner."

Election speculation

Mr Monti's move will fuel speculation over whether he intends to run to lead the country next year once he has resigned.

So far he has said he will step in only if the election result is unclear, but there has been growing speculation he could join forces with a centrist group.

Mr Monti's move also turns the tables on Mr Berlusconi, who seemed to have once again seized a political opportunity to keep his party in the political game just a year after being forced to resign amid a sex scandal and a debt crisis.

Financial markets have been closely watching the political upheaval in Italy and many in the business establishment have hoped for a second term from Mr Monti.

Mr Monti's year in office has been widely credited with restoring Italy's international credibility after the scandal-plagued Berlusconi era.

However Mr Berlusconi, Italy's most proved election campaigner, said he would not give in easily.

"I return in despair to politics and I'm doing it again for sense of responsibility," Mr Berlusconi said.

"Even when I was doing sports, working studying, I've never entered a race to get a good ranking but I've always entered a race to win."

President Giorgio Napolitano is now expected to set the date for an election which must come within 70 days of the government resigning.

Italy had in any case been due to go to the polls by April at the latest.

Italians will vote in the middle of a severe economic crisis, with a recession that began mid-way through last year showing no signs of abating and unemployment at 11.1 per cent, a record high.